In this post, I’ll go over the main issues influencing cryptocurrency businesses’ financial relationships as well as the reasons they lose banking partners.
This introduction lays the groundwork for understanding how banks assess cryptocurrency companies and what startups can do to foster confidence and sustain long-term financial support, from perceived risk and market volatility to regulatory uncertainty and stringent compliance requirements.
What is Crypto Startups?
The combination of cryptocurrency and blockchain technology has given rise to numerous new businesses known as crypto startups. These businesses create services, platforms, and products.
Digital asset exchange, cryptocurrency wallet, decentralized finance (DeFi) apps, non-fungible tokens (NFT) marketplaces, blockchain technology, payment gateways, Web3 apps, and other such services are all areas of crypto startups.
These startups create services that utilize cryptography and distributed ledger systems to create, and permit safe, transparent, and fully decentralized interactions that do not need to rely on traditional middleman methods.
The boundary of crypto startups are finance, computing, and legislation. They compete and create within a legally grey market continuously adjusting its legislation on a jurisdiction by jurisdiction basis to control financial elements of cross-border commerce.
For crypto startups to succeed, they need to create a reputation in order to gain the trust of the users within the developing ecosystem. Businesses need venture capital, blockchain token sales, and partnerships to succeed and gain trust.
Why Crypto Startups Lose Banking Partners
Regulatory Uncertainty
Uncertain and ever changing crypto law makes banks reluctant to build partnerships in the long term with crypto companies.
Intensive KYC and AML Requirements
Banks are pressured to ensure their crypto clients are in compliance with anti-money laundering and identity credentialing verification which exponentially increases the compliance burden.
High Perceived Risk Profile
Crypto companies are regarded as high risk and are considered vulnerable to fraud and scams.
Market Volatility
Rapid or drastic changes in the market can prove to be financially destabilizing to crypto startups which creates large concerns for banks in regards to credit or liquidity risk.
Reputation Risk for Banks
Establishing a partnership with a crypto company can lead to adverse news and adverse attention from regulatory bodies.
Transaction Monitoring Challenges
Banks may find it difficult to monitor crypto transactions since they are done on blockchain and are difficult to track.
Compliance Costs
Banks incur large costs for the training of employees for compliance measures as well as the development or purchase of compliance systems in order to support their crypto clients.
Cross-Border Complexity
It can be difficult for banks to navigate their compliance dealings with different regulatory and legal systems across countries.
Past Industry Failures
The reputation of crypto banks is negatively impacted by the poor reputation of crypto companies and their tendency to collapse and encounter scandals.
Reduced bank profitability
the risk and compliance burden may outweigh the benefits of servicing crypto startups.
Regulatory Challenges
Unclear Legal Classification: Countries have differing policies on the crypto classification. It is often tough to figure out if it is an asset, currency, or security.
Rapidly Changing Regulations: The government often makes sudden changes to the regulations pertaining to crypto. Start-ups then have to face making changes to their policies.
KYC and AML Laws: Regulations pertaining to Know Your Customer (KYC) and Anti-Money Laundering (AML) increases the cost of compliances and onboarding time.
Licensing and Registration Requirements: There are increasing numbers of regions that require crypto businesses to have licenses to trade.
Cross-Border Compliance Issues: When moving crypto internationally, multiple compliance requirements need to be considered.
Data Privacy and Security Rules: Laws like the General Data Protection Regulation (GDPR) have strict requirements on data handling and require data to be handled per the customer’s preferences.
Tax Reporting Obligations: To remain compliant, Start-ups have to add the functionality of tracking and reporting user transactions to their platform.
Regulatory Scrutiny from Banks: Banks are quick to lay their regulatory burdens on crypto.
Perceived Risk by Banks
Money Laundering Risks
Banks make crypto associated transactions due to the anonymous wallets and cross-border transactions.
Fraud and Scam Risks
The traditional financial banks see the phishing, rugged pulls, and hacks of the cryptocurrency markets as a fraud/scams high risk to the banks.
Market Volatility Risks
Due to the extreme price swings, the bank’s start-ups in cash flow, reserves, and financial stability gets impacted.
Reputational Risks
When a bank’s cryptocurrency client gets involved in legal issues the bank believes they may face reputational damage and/or a regulatory backlash due to a the client being in a legal compliance controversial situation.
Lack of Transparency Risks
Banks face the risk of assessing the risk blockchain services, third party, and structures.
Counterparty Risks
Banks see additional risks with trading platforms, liquidity providers, and DeFi services, due to the partnerships the bank may have with those structures.
Operational Risks
Crypto platforms worry banks with system shut downs, smart contract bugs, and custody failures.
Regulatory Risks
Banks face the risk of sanctions due to a crypto client breaking a financial law, which results in the bank being regulated more strictly by governing bodies.
Operational and Technical Challenges
Integration with Legacy Banking Systems
Many financial institutions and banks are built on outdated infrastructure that does not properly interface with blockchain solutions.
Real-Time Transaction Surveillance
The compliance and antifraud transaction monitoring solutions in the blockchain space are extremely advanced and still involve constant transaction monitoring.
Scalability
An avalanche of new users can create a positive feedback loop that ultimately causes a blockchain ecosystem or wallet to become nonresponsive or entirely shut down.
Operational Risk and Cyber Threats
The threats of hacking, phishing, and scams create the risk of losing the crypto space operational advantage.
Custody and Key Management
Systems of extremely sophisticated and highly secure methods for keeping and controlling the custody of private keys are operationally burdensome.
Exorbitant Supply Costs
Funding the monitored storage of efficient computing blockchain nodes can be exceedingly costly in the initial rounds of funding.
Interoperability Restriction
Unlike automated clearing houses and payment networks, various crypto currencies (and financial systems) do not optimize the interbanking payment processes, which lead to impotent financial reporting.
Data Privacy Compliance
Protecting and keeping users of the system private compliant on a blockchain is the exact opposite of the transparency that blockchain systems are designed to facilitate.
Processing Time
Transfers of currency that are the results of a conversion to and from crypto and fiat currencies are often supremely sluggish and involve multiple intermediary systems.
Can crypto startups avoid losing banking partners?
Yes, by establishing robust governance, transparency, and compliance frameworks, cryptocurrency businesses can lower their risk of losing financial partners.
This entails putting in place reliable KYC and AML procedures, keeping accurate financial records, carrying out frequent audits, and proactively providing banks with risk and transaction data.
Startups can show dependability and long-term stability by working with crypto-friendly or fintech-focused institutions, diversifying their banking ties, and staying ahead of legislative changes. This gives banks more confidence to continue their agreements.
Future Outlook
As regulatory frameworks become more established and standardized across key jurisdictions, the future prospects for cryptocurrency companies and their banking ties in 2026 and beyond are cautiously hopeful.
It is anticipated that clearer licensing policies and international compliance standards will lessen confusion for banks, making it simpler to evaluate and control risk associated with cryptocurrencies. Simultaneously, the emergence of cryptocurrency-friendly banks, fintech organizations, and blockchain-based compliance solutions will probably enhance transaction monitoring and transparency.
It is anticipated that trust between traditional financial institutions and the cryptocurrency industry would progressively grow as startups implement greater governance, audited reserves, and real-time risk reporting, allowing for more solid and long-term collaborations.
Conclusion
In conclusion, the primary reason why cryptocurrency companies lose banking partners is because they operate in a risky and quickly changing regulatory environment that puts established financial institutions to the test. Banks’ operational and reputational issues are increased by unclear regulations, stringent compliance requirements, and the difficulty of tracking blockchain transactions.
These elements, along with market volatility, cybersecurity risks, and previous sector setbacks, make many banks wary of sustaining long-term partnerships. To gain trust and ensure long-term access to banking services, cryptocurrency businesses must establish robust governance, clear compliance processes, and diverse financial alliances.
FAQ
Why do banks consider crypto startups high-risk?
Banks often view crypto startups as high-risk due to concerns about money laundering, fraud, regulatory uncertainty, and the volatile nature of digital assets, which can affect financial stability and compliance obligations.
How do regulations impact banking relationships for crypto startups?
Strict KYC, AML, licensing, and reporting requirements increase compliance costs and legal exposure for banks, making them more cautious about maintaining partnerships with crypto businesses.
Can crypto startups avoid losing banking partners?
While risk can’t be eliminated, startups can reduce it by maintaining transparent operations, strong compliance programs, audited financials, and proactive communication with banking partners.
Do all banks refuse to work with crypto startups?
No, some fintech-friendly and digital banks specialize in serving crypto and blockchain companies, offering tailored services and better understanding of industry-specific risks.
